Toyota’s Business Model Canvas: How it Changed the Way We Make Things

Toyota produces cars with the highest resale value, and it’s not an accident. This corporate behemoth has been thoroughly manufacturing reliable and safe vehicles; it’s no wonder that Toyota cars are among the most popular brands in the world.

Among many achievements, Toyota became the first company to manufacture more than 10 million cars a year. And in 2008, it became the world’s largest automobile manufacturer for the first time in 2008 surpassing other giants like Ford and General Motors.

It’s pretty apparent that Toyota’s business model is profitable. At the end of 2020, Toyota was the leading motor vehicle manufacturer worldwide based on global sales. In the first quarter of 2021, Toyota Motor Corporation’s net revenue was $247 billion U.S. dollars.

The company owes some of its success to its unique manufacturing process that makes them produce cheaper and better cars faster. Toyota knows how to make cards, and it does it so well. But it’s done much more than just give us the ever-reliable Corolla and the durable Land Cruiser – it’s changed the way we make products.

Let’s take a step back into the history of one of the most successful corporations of the 20th century.

Toyota’s Business Model Canvas: How it Changed the Way We Make Things

1933-1945: Surviving World War II

The Automobile Industry in Japan Pre 1933

During the late 1920s, the Japanese economy was rapidly modernizing and expanding. There was a gap in the local automobile industry, and demand for modern cars was rising. Recognizing the opportunity for growth, Ford and General Motors built factories in Japan. The vehicles were imported from the States in knock-down kits and assembled locally.

By the end of 1929, both General Motors and Ford controlled most of the automobile market, producing 28,000 cars that year.

1933: From Loom Making to Automobile Manufacturing

The Toyota Motor Corp was created in 1933 by Kiichiro Toyoda when he established it as a division within his father Sakichi Toyoda’s Toyoda Automatic Loom Works Company. Sakichi was the son of a carpenter and learned a great deal about the craft from his father.

He, however, had an eye for invention and left carpentry to focus on making looms for weaving. Sakichi came up with many innovations, remarkably improving the functionality of the looms he created. Sachiki developed the famous Type G automatic loom, which could automatically stop when a thread broke.

This system prevented any defective clothing from being produced. What Sachiki didn’t know yet was that he had developed the foundations of the system that would make Toyota Corp a success.

Due to the superior quality of the Toyoda looms, they became very successful. However, Sachiki was aware of how the world was going and encouraged his son Kiichiro to venture into the automobile business. In 1930, Kiichiro took his father’s advice and began conducting research into small gasoline-powered engines.

In 1933, using the resources of the Toyoda loom company, an automobile division was established. But it wasn’t an easy start for the Toyota Motor Corporation. They started off making very simple trucks which were unfortunately poor-quality. The trucks had primitive technology. For example, they would hammer body panels over logs. They had little success.

1935: Toyota’s First prototype; the G1 Truck

In May 1935 produced his first prototype vehicle called the G1 truck. The body was similar to the Chrysler Airflow. Toyota had copied the engine from a Chevrolet and the chassis from a Ford.

Unfortunately, this early version of the G1 truck broke down a lot. Customers were carefully chosen from the pool of local buyers to keep the brand reputation intact. Toyota developed a robust aftermarket support system. This division was responsible for taking care of customers and would at times replace entire trucks without question.

To further curb the problem, Toyota loaned their development and production engineers to dealers so that they could learn what needed to be changed in the production process.

The following year in 1936, Toyota came out with its first production car, the Model A.A. Sedan. To develop this model, Toyota purchased the locally manufactured Ford and General Motors products for reverse engineering. Additionally, they hired engineers who had previously worked at the Ford and General Motors factories. 

Toyota Motor Corporation is incorporated

In 1937, the Toyota Motor Corporation was created as an independent company. And the following year, the company opened its plant and started operations. As World War II began, the 1940s brought on a dramatic change for Toyota.

Toyota was mandated by the Japanese government to produce trucks for the Imperial Japanese Army. However, Japan had very few natural resources of its own so being frugal and resourceful was an essential part of the manufacturing process. Additionally, the war caused a shortage of materials. Hence, Toyota had every incentive to develop engines that were highly fuel and cost-efficient.

The company made modifications to the trucks by reducing the number of headlamps to one central one. It also had brakes on one of the axles.  Toyota had to expand rapidly to try and meet the demands of WWII.

A significant step toward that was establishing a research center to begin work on battery-powered cars. In 1940, they took it a step further and established the Toyoda Science Research Center and the Toyoda Works. In 1941, Toyota launched the Toyoda Machine Works Ltd as a separate division meant to handle the production of machine tools and auto parts.

Toyota’s Business Model Canvas: The Early Days

At this point, Toyota’s Business Model Canvas looked like this:

Value Proposition

  • Affordable trucks and sedans

Customer Segments

  • Middle class Japanese
  • Japanese Military

Customer Relationships

  • Strong aftermarket support division

Channels

  • Dealers

Revenue streams

  • Selling cars and trucks.

Key activities

  • Product development
  • Making tracks for Japanese Army
  • Research and Development

Key resources

  • Staff (engineers and aftermarket support staff)
  • Research center
  • Toyoda Machine Works (production of tools and parts division)

Key partners

  • Japanese Army

Cost structures

  • Location expansion
  • Production (manufacturing, distribution, and logistics)
  • Staff
  • Research and Development
Business Model Canvas of Toyota: The Early Days

1946-1960: Toyota Post the War; Finding its Footing

After WWII, Japan was left in a dire economic position. Metals such as steel were scarce. Due to a lack of natural resources, Toyota had to be creative to compete with overseas companies.

Most of their facilities had been wrecked during the war. Toyota was left with 3,000 employees but no working facilities. To make matters worse, the entire auto industry in Japan had been issued a passenger car ban by the American occupation forces. They were only allowed buses, taxis, and trucks.

As the Japanese motor industry was beginning to recover, there was concern that European and American auto manufacturers would overtake the Japanese market.

Nevertheless, Kiichiro Toyoda recognized that the ban would be lifted one day. Since American manufacturers were focusing on medium-sized and larger cars, Toyoda began working on a prototype for a commercial passenger car in 1946. Toyota hoped that by focusing on small cars, they could avoid a head-on market confrontation.

1947: Commercial Passenger Car Production Starts

The Model S.A. prototype was completed in January 1947.  Thankfully, Toyoda’s predictions came through because the American General Headquarters began granting passenger car manufacturing permits just six months later.

However, they were limited to only 300 passenger cars a year. Toyota managed to produce just 215 that year. The Toyopet Model S.A. had a similar shape as the V.W. beetle and was the first Japanese car to use a four-wheel independent suspension. It also had hydraulic brakes, whereas most of its rivals had mechanical systems.

While the car was a success design-wise, it was a flop commercially. Very few Japanese people could afford cars at this time. They instead marketed the vehicle to taxi fleets, but the S.A. only had two doors and was not suitable for that market. Moreover, its independent suspension simply couldn’t handle Japan’s rough roads.

1949-1950: Financial, Labor Troubles & the Just-In-Time System

Toyota was on the brink of bankruptcy by the end of 1949. The reason was the cutoff in Reconstruction Finance Bank loans and the drop in demand for cars due to the recession. Additionally, the price of materials for cars had risen considerably, and cash management in the company became an issue. 

Other automobile manufacturers in the country began laying off workers. For Toyota, this was not an option mainly because Kiichiro had seen the devastation brought on by the Great Depression in 1930. He wanted to avoid dismissing his employees at all costs, so Toyota held onto their no-employee reduction policy. 

Instead, the company opted to negotiate a 10% cut in employee wages, but this was not enough to reduce the enormous deficit, which was 22 million yen every month (about $ 15,124 966,763 billion US today). Desperate for a solution, Kiichiro approached various banks in the city every day to get financing. Unfortunately, he was not able to secure anything.

Toyota’s Managing Director of Sales, Shotaro Kamiya, stepped in and persistently requested financing from Sogo Takanashi, the Manager of the Nagoya branch of the Bank of Japan. Thankfully Kamiya was able to succeed, and Toyota received a loan from a consortium of 24 banks established through the placement of the Bank of Japan.

The loan had specific conditions, however. Toyota Motor Corporation would receive 188.2 million yen but had to agree to a reconstruction plan. Some of the conditions were that Toyota had to create an independent sales company and dismiss surplus employees.

1950-1956: Toyota Motor Sales Co., Ltd & Labor Issues  

Unfortunately, the financial crisis worsened, and the company’s business performance never recovered. There were restrictions on the supply of production materials, which was still under the Japanese Ministry of International Trade and Industry control.

While the controlled prices of materials were gradually raised after that, the controlled prices of automobiles remained unchanged. The business’s profitability remained difficult for many Japanese automobile manufacturers, including Nissan Motor Corporation and Isuzu Motors.

From November 1949 to March 1950, Toyota Motor Corporation had a total loss of 76.52 million yen. While the Toyota Motor Sales Corporation was created in April 1950, it became necessary to reduce the labor force despite strong rationalization measures.

Toyota had to ask at least 1,600 employees to voluntarily retire. This sparked a heated labor dispute with the Toyota Motor Corporation Labor Union. Labor-management negotiations intensified into long-standing disputes since the company had promised not to dismiss any of its personnel.

Eventually, Toyota had to lay off as many as 2,146 employees, more than the expected 1,600. The Union was furious, resulting in daily strikes for about two months. Production from April to May dropped by 70%, plunging the company into further financial issues.

The tension was too much for Kiichiro Toyoda to handle. He became seriously ill, so negotiations with the labor union were handed over to the management. Eventually, Toyoda resigned as the company president, and the dispute subsided.

To avoid future labor strikes, the Toyota Motor Sales Corp took over all domestic marketing functions and labor and management relationship support. The subsidiary was also responsible for overseas marketing.

By the end of 1950, there were 47 sales outlets for Toyota vehicles in Japan. Another break for the company came in the form of the Korean War. The U.S. military placed an order of over 5,000 cars, and the company was revived.

The Just-In-Time System

The 1950s also signaled a significant change for Toyota. Eiji Toyoda and Taiichi Ohno took on a prominent role in the development and progress of Toyota. Taiichi Ohno was a Japanese industrial engineer and businessman. He worked at the Toyoda Spinning and Automatic Loom Works in the late 1930s and rose up the ranks of the Toyota Motor Company until he became director in 1956. 

Eiji Toyoda was Sakichi Toyoda’s cousin who had also joined the Toyoda Spinning and Automatic Loom Works.

Because Toyota was experiencing severe cash flow problems in the late 1940s into the 50s, the company had introduced strict cost-cutting and “voluntary” retirements. It was evident that the company was near collapse.

Eiji visited the Ford River Rouge Complex in Michigan during the early 1950s. He was very impressed by the facility’s scale. Still, he noticed many inefficiencies, including the batch and queue system of making parts. Toyota had been in the car manufacturing business for 13 years and had produced over 2,500 automobiles. For comparison, the Ford plant manufactured over 8,000 vehicles a day.

Eiji and Ohno decided to adopt the American automobile mass production system but with a qualitative twist. Large companies like Ford and General Motors could afford to make large batches of single parts and have huge inventories. Toyota didn’t have that luxury, so they started looking at ways to help the company compete with their American counterparts.

They came up with the just-in-time system, which involved making and delivering a part to the assembly line until it was needed. The pair also revamped the corporate culture in the company by employing the culture that every employee was responsible for meeting the customer’s expectations.

This was the first step towards developing the Toyota Production System and improving the quality of Toyota’s products. 

1955-1960: A New Age for Toyota

Toyota focused more on new sedan-style passenger cars and had launched the Toyota Crown in 1955. In April 1956, the Toyopet dealer chain was established to improve the company’s distribution channels.

The following year in 1957, Toyota’s Crown became the first car from Japan to be exported to the United States and to Toyota’s Brazilian and American sales divisions, which were launched that year. Unfortunately, the Crown was poorly received in the U.S. due to its high price and lack of horsepower.

But this didn’t deter Toyota. They launched a slightly smaller and more economical sedan called the Toyota Corona a few months later.

Toyota expanded its distribution networks by creating separate sales networks called Toyopet Stores to sell the Corona and the Toyopet ToyoAce trucks. The company also launched a dealership network in Japan for commercial diesel vehicles (trucks, buses, and forklifts) called Toyota Diesel Stores. 

Toyota also focused heavily on expanding its production facilities. The aim was to produce at least 10,000 vehicles a month as demand had snowballed. Manufacturing of the famous first-generation Toyopet Model ST10 Corona body had been outsourced to Kanto Auto Works Ltd. Toyota’s existing plants could not accommodate the necessary assembly lines, additional chassis, and painting. 

Toyota wanted to produce all parts of its passenger models internally. In 1958, they decided to build a manufacturing plant dedicated to making passenger cars, including the Corona. That same year they released the Land Cruiser 4 x 4, which had more success in the U.S. than the Corona. The company also opened a production plant in Brazil, the first one outside Japan. 

The local Motomachi Plant was opened in 1959, which would become the home of passenger car production for Toyota. By the time 1960 ended, Toyota had a decisive lead over Nissan. The Toyota Production System was entirely developed at this point, and they had implemented the Lean Manufacturing System with all their key suppliers. 

Toyota’s Business Model Canvas: The Days of Figuring It Out

At this point, Toyota’s Business Model Canvas looked like this:

Value Proposition

  • Quality passenger cars
  • Quality trucks and other diesel-operated cars.

Customer Segments

  • Upper-middle-class and upper-class car buyers
  • U.S. military

Customer Relationships

Channels

  • Toyota’s extensive local and international distribution network

Revenue streams

  • Selling cars

Key activities

  • Product development
  • Labor management
  • Expansion in Japan
  • Building manufacturing plants

Key resources

  • The Toyota Production System

Key partners

  • Consortium of Banks
  • Japanese Ministry of International Trade and Industry

Cost structures

  • Product development
  • Building plants and expansion of distribution network
  • Production (manufacturing, distribution, and logistics)
Business Model Canvas of Toyota: The Days of Figuring It Out

1961-1999: Establishing Dominance

During the next two decades, Toyota began expanding at a rapid rate. The 1960s were a magnificent decade for Toyota. The overseas market was hungry for Toyota’s products, so the company started exporting large numbers of cars to foreign markets.

In 1961, Toyota Motor Thailand Co., Ltd. was established. That same year Toyota launched the Publica model that they hoped would be a car for everyone, much like the original V.W. was. The Publica was a small, plain and cheap car. However, the car proved too basic for the Japanese middle class, who had grown a taste for more sophisticated designs.

The problem was that while the Corona and the Crown were too expensive for the middle class and the Publica too dull. In typical Toyota fashion, they reacted quickly and rethought their design, coming up with the Toyota Corolla.

A Toyota engineer called Tatsuo Hasegawa noticed that the Opel Kadett was a success in Germany. The Kadett had a sophisticated design and was a very light car. This car was slowly replacing the V.W. beetle as a favorite in Germany.

Hasegawa designed the Corolla the same way, except it was sized between the Publica and the Corona. It had a very classy look, relatively modest horsepower, and was inexpensive. By 1962 the company had produced its millionth vehicle in Japan and was slowly establishing dominance worldwide.

Hello Toyota Corolla & New Acquisitions

Toyota was awarded the Deming Prize, Japan’s highest honor for quality. The Corolla was launched in 1966, and by March 1968, more than 3,000 Corollas were being exported every month. The Toyota Corolla was well on its way to becoming everyone’s car.

Toyota also made a series of key acquisitions, including:

  • Hino Motors Ltd was acquired in 1966. It manufactured large trucks and buses.
  • Nippondenso Company Ltd was acquired in 1967. It manufactured electrical auto components.
  • Daihatsu Motor Company Ltd was also acquired in 1967.  

All these steps allowed Toyota to establish itself as Japan’s largest automobile manufacturer. The company also continued to thrive in overseas markets, including the American market.

1970-1979: Refining the Toyota Production System

Toyota Production System helped the company gain a reputation for low-cost, fuel-efficient, and reliable vehicles. As the ’70s rolled by, Toyota continued advancing in both sales and quality. The Toyota Production System became even more refined, and the company increased production without compromising on quality and reliability. In 1972, Toyota produced its ten millionth vehicle domestically, and exports reached five million units in 1975.

Toyota had previously tried to enter the sports car market with the 1965 sporty but small Sports 800 and the bigger 2000GT in 1967. While these models were an initial success, they were expensive to manufacture, and the S800 only appealed to the outright enthusiast.

The company was ready for a sports car that could appeal to the average buyer. It had to be easy to drive, reliable, and practical. In 1978, Toyota launched the Celica XX. The car was trendy and used in competitions.

Several Toyota models came out during the 1970s, including; the Carina, Publica Starlet, Chaser, Corda, Tercel, Town Ace, and Light Ace. Toyota also established the Calty Design Research Center in California to support North American operations and provide all design solutions for Toyota’s cars.

In 1977, Toyota opened the Toyota Technical Center in Michigan, United States, to support Toyota’s North American engineering and Research and Design activities. 

Toyota also built and opened one plant every two years.  

1980-1989: Product Diversification & Global Takeover

The ’80s were also the time when Toyota’s overseas production began to take off. To consolidate the growth, the Toyota Motor Corporation and the Toyota Motor Sales Corporation merged in 1981. 

Toyota’s production and sales continue to soar. By 1985 exports had reached 20 million units and by 1986 Toyota had produced its 50 millionth car in Japan.  In 1984, the New United Motor Manufacturing, Inc. was launched. It was a joint venture with General Motors to re-launch the General Motor plant in Fremont, California, and strengthen Toyota’s position. Under the joint venture, the plant would manufacture cars for both brands.  

The partnership also benefitted General Motors who had been struggling to sell high-quality and fuel-efficient small cars. They could now have access to the Toyota Production System and could penetrate the small car market.   

For Toyota, the factory would give them a manufacturing base in North America thereby avoiding the tariffs on imported vehicles. Moreover, General Motors would prove valuable in navigating the American labor environment, particularly relations with the United Auto Workers union.

Product Diversification

In August 1983, Toyota decided that it wanted to venture into the luxury vehicle market. They wanted a product that could compete with Mercedes and BMW.

The company tasked Ichiro Suzuki as the lead engineer for the new project. Suzuki conducted a few focus group interviews with luxury car owners to help him figure out how to design the new car. He established that the new Toyota product needed to invoke status and prestige; it had to be high quality, have excellent resale value, safety and performance. The Lexus was launched, but it had a relatively low performance compared to Mercedes and BMW.

1990-Present: Consolidating its Global Position

Toyota had been steadily building production facilities overseas all through the 70s and 80s. It wasn’t until the 90s that production really took off. By 1994 annual overseas output was over one million units and rising.

Toyota continued to add new products to its lines, such as the AV4, Harrier, Prius Hybrid, and so many more. The introduction of the Prius in 1997 changed the auto industry; it was a radical departure from using a gasoline or diesel engine to power the vehicle. A gasoline engine could now be coupled with a battery-powered electric motor to improve the car’s fuel mileage.

From then on, Toyota opened more manufacturing plants, acquired many more key companies, and developed more products.

Toyota’s Business Model Canvas: Global Domination

At this point, Toyota’s Business Model Canvas looked like this:

Value Proposition

  • A wide variety of reliable and quality cars

Customer Segments

  • Mass market
  • Sport car fanatics
  • Luxury vehicle lovers

Customer Relationships

  • Quick service

Channels

  • Dealers

Revenue streams

  • Selling cars

Key activities

  • Global expansion
  • Research and Development
  • Acquisitions

Key resources

  • Global facilities, suppliers and distribution networks
  • Toyota Production System

Key partners

  • General Motors

Cost structures

  • Location expansion
  • Production (manufacturing, distribution, and logistics)
Business Model Canvas of Toyota: Global Domination

Conclusion

Today Toyota Motor Corporation is an automobile giant, one of the biggest auto manufacturers. It offers a full range of models, from mini-vehicles to large trucks. In addition to automotive products, Toyota has many subsidiaries that manufacture steel, rubber, and cork materials, synthetic resins, cotton, automatic looms, and woolen goods.

The other subsidiaries deal in real estate, the import and export of raw materials, and prefabricated housing units. Toyota went from a simple but formidable automobile manufacturing company to a global powerhouse. But more than that, Toyota’s lean manufacturing system changed the way we make things.

Toyota showed manufacturers that there was a way to reduce waste by stocking what was needed. This meant companies could now operate on a tighter budget and in turn increase profitability.

Sources

  • https://www.statista.com/statistics/262752/total-net-revenues-of-toyota/
  • https://www.britannica.com/topic/Toyota-Motor-Corporation
  • https://www.washingtonpost.com/archive/local/1980/12/26/toyotas-shotaro-kamiya-pioneer-in-auto-industry/01259567-804c-47c8-a032-1de7c1af9518/
  • https://www.toyota-global.com/company/history_of_toyota/75years/text/entering_the_automotive_business/chapter1/section1/item1.html
  • https://en.wikipedia.org/wiki/Toyota_dealerships_(Japan)
  • https://japanesenostalgiccar.com/the-toyopet-sa-was-toyotas-first-post-war-passenger-car/
  • https://en.wikipedia.org/wiki/Kiichiro_Toyoda#Hard_situation
  • https://www.toyota-myanmar.com/about-toyota/toyota-traditions/company/financial-crisis-and-toyota-motor-sales-co-ltd-s-foundation
  • https://en.wikipedia.org/wiki/Eiji_Toyoda
  • https://global.toyota/en/company/vision-and-philosophy/production-system/
  • https://www.encyclopedia.com/social-sciences-and-law/economics-business-and-labor/businesses-and-occupations/toyota-motor-corp
  • https://tatourian.blog/2018/12/20/how-toyota-changed-the-way-we-make-things/#:~:text=Toyota%20knows%20how%20to%20make,faster%2C%20cheaper%2C%20and%20better.

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